On October 1, 2008, the United States Securities and Exchange Commission (“SEC”) announced the extension of several temporary orders intended to ensure the continued smooth operation of orderly markets. While the SEC noted several important factors short selling provides to an efficient market, the SEC continues to be concerned about short selling tactics used to mislead the markets.
- The SEC will extend its prohibition of short selling in financial companies. Originally, this order was set to expire on October 17, 2008. However, due to passage of the Emergency Economic Stabilization Act of 2008, the SEC order will expire at 11:59 ET on Wednesday, October 8, 2008.
- The SEC extended its order requiring institutional investment managers to report short sales and short positions of section 13(f) securities on Form SH. This order is extended until 11:59 p.m. ET on Wednesday, October 17, 2008. However, the SEC intends that the order will continue in effect beyond that date without interruption in the form or an interim final rule. The SEC will seek comments on all aspects of the anticipated rulemaking.
- The temporary easing of restrictions on the ability of securities issuers to repurchase their securities has been extended and is set to expire at 11:59 p.m. ET on October 17, 2008.
The SEC has also taken steps to strengthen the ban on naked short selling and to increase the penalties against such actions. The following has been taken directly from the October 1, 2008 SEC press release.
- The SEC has extended its order requiring that short sellers and their broker-dealers deliver securities by the settlement date (three days after the sale transaction date, or T+3) and imposing penalties for failure to do so. If a short sale violates this close-out requirement, then any broker-dealer acting on the short seller’s behalf will be prohibited from further short sales in the same security unless the shares are not only located but also pre-borrowed. The prohibition on the broker-dealer’s activity applies not only to short sales for the particular naked short seller, but to all short sales for any customer. The extension of this order is set to expire at 11:59 p.m. ET on Oct. 17, 2008. However, the SEC intends that the order will continue in effect beyond that date without interruption in the form or an interim final rule. The SEC will seek comments on all aspects of the anticipated rulemaking.
- The SEC stated that the repeal of an exception for option market makers from short selling close-out provisions was made permanent through a final rule to eliminate the exception under Rule 203(b)(3) in Regulation SHO.
- The SEC stated that Rule 10b-21 which became effective at 12:01 am, ET on September 18, 2008 covers short sellers who deceive broker-dealers or any other market participants about their intention to ability to deliver securities in time for settlement. The rule makes clear that such persons are violating the law when they fail to deliver.
Stay tuned to RIA Compliance Consultants, Inc, for further developments regarding short selling rules and orders issued by the SEC. If you would like to view the SEC’s press release which includes links to the various orders, click here.